Transaction Capital CEO David Hurwitz is bullish on the firm’s acquisition in Australia, its first outside SA. After announcing more than two years ago that it had a R1bn war chest, Hurwitz pleased shareholders on Tuesday with news that it had deployed R500m on three acquisitions, one in Australia and the others in SA.
"We are encouraged that management have deployed excess capital and expect this will result in an improved return on equity, which has recently been low as a result of a lazy balance sheet," said Bjorn Zietsman, a portfolio manager at CoroCapital.
"We expect the return on equity to trend north of 20% over the next 18 months, which should prompt a rerating in the share price," said Liam Hechter, an analyst at Anchor Capital.
On Tuesday, the share ended 3.14% ahead of its Monday close, as the specialist financial services business posted a 17% increase in headline earnings to R458m for the year to September over the previous period.
Earnings were in line with expectations, Hechter said.
In Australia, Transaction Capital bought 100% of Recoveries Corporation Group for A$43m (R448m), A$10m of which is subject to certain profit targets running to June 2018.
In SA, it acquired Roadcover, which provides subscription-based value-added services to the mass market.
It also acquired The Beancounter, which provides accounting, payroll and tax software to small businesses.
The Beancounter would augment Transaction Capital Business Solutions’s small-business offering, while there was potential to sell Roadcover products to the group’s SA Taxi clients, Hurwitz said.
Recoveries Corp, which provided debt-recovery services to the government and companies, is a natural fit with Transaction Capital Risk Services.
Debt collections in Australia had been helped by a combination of a strong moral obligation to repay, the ease of contacting individuals and high employment levels, Hurwitz said.
Recoveries Corp’s largest client is the Australian Tax Office, followed by insurance firms, for which it does claims recovery. This involves collecting money from uninsured drivers who have caused accidents involving insured drivers.
Transaction Capital would use these capabilities in SA, where uninsured drivers were responsible for 32%-40% of all motor insurance claims, Hurwitz said. It already provided claims-recovery services to eight insurers and was targeting another 20, he said.
"We’re not saying the acquisition drive is over," Hurwitz said, adding it would look for bolt-on acquisitions in Australia.
While it would be challenging to execute on all the acquisitions — particularly in an entirely new market such as Australia — Hechter said the market generally underestimated the defensiveness of Transaction Capital’s earnings.